Debt Settlement for Personal Loans: A Path to Financial Freedom

When in a financial crunch, many people turn to options like personal loans to tide them over. However, these are unsecured loans (i.e., without collateral) that one should not depend on entirely, given the high risk of falling into personal loan debt.

Due to different reasons, it can become hard for people to pay off these loans on time. For people with a high amount of outstanding debt, debt settlement is a suitable strategy to try to regain financial stability. In this article, we will cover further on how this works and why you should consider adopting this debt relief program.

The Burden of Personal Loan Debt

In today’s environment of high cost of living and increased delinquency rates, this type of unsecured debt is gradually growing into a major problem. Reportedly, there was a record of 26.9 million outstanding personal loans in the first quarter of 2023. However, reports suggest that the number of borrowers was around 22.4 million. This means that a lot of the borrowers had more than one unsecured personal loan to their name.

There are multiple factors that possibly contribute to the increasing prevalence of personal loans among borrowers. Here are some examples:

• Bad financial management - Some people struggle with maintaining a set budget or have a tendency to overspend. Without proper money management habits in place, they can fall into debt and may get a personal loan to tide them over.
• Insufficient income - Having a limited amount of money can prompt one to turn to other funding options like personal loans. Plus, if sudden expenses come up when you are not financially stable, like car repairs or medical bills, that’s another cause of tension.
• Credit card debt - Some credit card users keep paying only the minimum monthly payments but continue to buy more items with their credit cards. However, they fall into a cycle of revolving credit card debt this way and might apply for personal loans for financial backing.
• Low financial knowledge - A person might fall into the trap of predatory lenders or scams, which further harm their finances. Plus, a lot of people who take personal loans do not fully understand the terms related to it. Due to poor financial knowledge, they make wrong borrowing decisions, which further thrust them into personal loan debt.

Naturally, we can see the impact of personal loan debt on the borrowers, both financially and psychologically.

If you cannot make any monthly payment towards your loan each month, that will put a lot of strain on your budget. Plus, you would not be able to focus on your long-term savings goals and investments. Your credit score will also drop significantly, which will take a long time to recover from. Emotionally, the financial pressure of debt and subsequent worrying about your finances will trigger more feelings of anxiety and depression. That will hamper your mental health and may even affect your interpersonal relationships.

You need to get rid of your debt faster to recover your financial stability with time. Debt settlement as a solution is one to consider here.

"Not only does successful debt settlement lead to positive feelings of "okayness" and relaxation, but it also takes the burden off of the individual to have to constantly arrange for the repayment of the debts," says Adam Garcia, founder of The Stock Dork. "These mental and psychological benefits mean that a person feels less stressed when they know that they are moving towards a position of debt freedom and better quality of life."

Before discussing why you should go for debt settlement to clear your loan debt, let's understand what it involves.

Understanding Debt Settlement

Debt settlement is a type of debt relief strategy that involves paying off a part of the owed amount and forgiving the remaining debt. Borrowers usually take the help of experts from debt settlement companies to negotiate the amount to a partial amount. After your creditor agrees to the deal, the debt collection calls stop.

The debt settlement companies work as the middleman between borrowers and lenders in this process. They handle the debt settlement negotiation on behalf of the borrowers in detail. While you can do the negotiation on your own, experts from debt settlement companies are more experienced and trained in the process.

So, you can expect a higher success rate with their support. Of course, you should properly check which is a good debt settlement company among the options before finalizing one. Go through their company reviews and research about their process, services, fees, terms, etc.

Why Choose Debt Settlement Over the Other Debt-Relief Options?

There are multiple other debt relief strategies you can use to go debt-free. You can try applying for debt consolidation loans or contact a bankruptcy attorney to file for bankruptcy. While such debt relief methods have their benefits, they may not suit the personal circumstances or needs of every borrower dealing with personal loan debt.

Let’s compare some of these against debt settlement:

As for debt settlement itself, the strategy assures some notable advantages for borrowers. Here are some of them:

• Reduction in the debt amount - With debt settlement, you will need to pay a relatively lower amount than you originally owed.
• Better alternative to bankruptcy - While bankruptcy can eliminate your debt fully, it is extremely damaging to one’s credit score. Plus, it remains on your record for a long time.
  Debt settlement is a better alternative than that. While this process has a negative impact on the credit score, it is not as harsh.
• Quickly resolve your debt - With debt settlement, you can resolve your debt significantly quicker. While the negotiations can stretch for a long time, you will be debt-free within 2-4 years with this process.
• Simpler payment - You do not need to make multiple, continuous payments to your creditors if you go for the settlement route. Generally, borrowers need to pay one lump sum payment, less than the original outstanding balance.

The Debt Settlement Process - What are the Steps?

Let's understand how the debt settlement process works with a step-by-step breakdown.

Step 1: Free consultation and debt assessment

Firstly, work with a debt settlement company to receive a free consultation about your financial condition. During this process, experts from debt settlement companies assess your personal loan debt status, amount, and type. They also check what other debt you have, like credit card debt.

Furthermore, they conduct a full evaluation of your financial health, including income and expenses. After a total financial assessment, they will determine if debt settlement will work for your situation.

Step 2: Develop a personalized debt settlement plan

Even if the debt settlement company achieves success with its negotiation efforts, you need enough funds to make the actual payment. If your original outstanding debt was huge, the partial amount may be a hefty sum. This is especially so if you need to make the payment to your creditor in one round to go debt-free.

So, the debt settlement company will plan a custom debt settlement plan for you after completing the full financial assessment. After setting clear financial goals, they will help create a realistic strategy for you to save money for the settlement amount.

“If you are able, set aside a bit of extra funds each month to ensure you have the bandwidth to handle an increase in your payments or an additional amount if a creditor is difficult to settle," says Ashley Morgan, a debt and bankruptcy attorney based out of Northern Virginia.

You can create a dedicated savings account and make regular payments to it. Besides that, experts from debt settlement companies also help prepare manageable budget plans for their clients.

Step 3: Negotiating with personal loan creditors

Next, the debt settlement company will contact your creditor(s) on your behalf. They will propose a settlement offer for your loans to them at a lower amount than the original balance. The debt settlement company will continue negotiation talks while leveraging your accumulated funds as settlement money to convince your creditors. Finally, they will get a written agreement for the reduced settlement deal from the lenders.

Step 4: Settling debts and becoming debt-free

After you get the settlement agreement in writing, you can use your savings in the dedicated savings account to clear the payment. Make sure your creditors mark them as "settled" or "resolved" on their report to the credit bureaus.

Conclusion

Indeed, personal loans can be very useful in times of cash crunch. However, without proper planning and discipline, you can fall into deep personal loan debt. You should make an effort to follow a well-planned budget and adopt good financial habits to regain economic stability. As for the debt, use a debt relief strategy like debt settlement to eliminate your debt and manage your finances better.

Of course, debt settlement has its dangers, too, like a drop in credit score and the need to pay the whole amount in one go. Plus, many creditors may not agree to a reduced pay-off amount. So, you should research credible debt settlement companies and get their help with the process. They will also provide financial and budgeting advice to help you regain control over your finances. Research your options well and proceed cautiously.